'Everything's going to grow': Morgans analysts say the time is now to go hard on commodities

The electrification of everything could catch the metals market as off guard as the urbanisation of China in the early 2000s, say Morgans analysts, who think investors can find real value in resources as demand for copper, lithium, graphite and more shifts up a gear.

Veteran WMC geologist and senior resources analyst Chris Brown led the chorus at the Noosa Mining Investor Conference in Queensland yesterday, saying he sees the same bubbling upside in commodities poised to benefit from the energy transition as copper when it sunk to US$0.85/lb in the late ’90s.

“I think we’re now looking at the same sort of potential upside that we saw when we recognised that China was one and a half billion people and wanted to make stuff and sell stuff,” he said in a keynote panel.

“The electrification of everything is going to put up demand for copper, increase the demand for rare earths, it’s going to increase the demand for aluminium and everything else, silica, a lot of the strategic and critical metals that we’re seeing presenting here today.

“So I think we’re looking at a great few years ahead of us, I think there’s a massive disconnect between commodity prices, and what our elders and betters and our politicians are telling us – that we’re going to need to produce for this electrification.

“I think we’re in for a good run and I still think there’s this massive disconnect between fundamental demand and commodity prices.”

If you’re not invested

While timing can be everything when it comes to stock picking, Brown warns this could be a long game to play.

“It’s a really interesting space,” Brown said. “I suppose it’s probably not if you’re worried about where next term’s school fees are coming from, because you never really know when things are going to go up.”

But that’s not to say he isn’t extremely bullish on the electrification story. Because oh, he damn well is.

“But if you’re not invested, you won’t get the benefit of that initial kick.

“Despite the expected move to electrification, we’re still underdone in copper. I just think there’s a strong thematic that we’ve seen for the last couple hundred years in copper, that’s just going to keep going.

“I don’t think the supply is really capable of satisfying just that demand level and the demand for electrification.”

He fingered rare earths and zinc as other prime movers, with a push towards offshore wind power — technology that requires 10 times the base metal’s content as onshore wind — to provide … er … tailwinds for the latter.

“I think everything is going to grow,” he said.

Sleeping giants?

Lithium has clearly been the big stalwart of the junior resources sector in recent times.

Vickerson says share prices of juniors have been helped by a wave of M & A interest in the commodity, including Albemarle’s rejected $5.5 billion bid for one-time penny stock Liontown Resources (ASX:LTR) and Pilbara Minerals’ (ASX:PLS) rumoured interest in Patriot Battery Metals (ASX:PMT) .

But he likes rare earths and graphite in the battery space as well.

“I think a lot of people are looking at big investments in wind to come, which is obviously going to support parts of the rare earth supply chain,” Vickerson said.

“So there’s a few names I saw on the agenda that we should be looking out for; (new listing) Augustus Minerals (ASX:AUG) is one we’re probably pretty familiar with I think people should pay attention.

“Beyond that I’m a bit of a graphite tragic, I’ve been disappointed for a few years in terms of the commodity price, but I think at some point, that’s a commodity that will have its day.

“And there’s a couple of names here on the agenda. We’ve got Greenwing (ASX:GW1), and Renascor (ASX:RNU), both who are in the earlier stages of projects.

“I think they’re worth paying attention to for a medium term opportunity.”

The cusp of another boom

Lithium chemical prices have stabilised at high levels in recent weeks after a big drop, more than halving from all time highs of over US$80,000/t over the first four months of 2023.

Vickerson says big margins remain for producers, but that another boom may not happen in the near term without “big stimulus” from the Chinese Government.

That could come once investment from the West in downstream processing really hits its straps.

“There’s a lot of investment decisions being made now with battery plants in the US and Canada and other US-allied countries, which will be really important, I think, in driving the next round of a price boom,” he said.

“A lot of the upstream production doesn’t necessarily happen in China for lithium, it’s still a player there. But it’s the battery processing which is going to be interesting when that moves offshore.

“I think it offers upside for producers and explorers.”

China’s stranglehold

Some explorers warn China’s stranglehold on some commodities, particularly rare earths, could impact the delivery of projects in the West.

Augustus managing director Andrew Reid’s explorer is up around 35% since its May float on hopes it can repeat neighbours Dreadnought Resources (ASX:DRE), Hasting Technology Metals (ASX:HAS) and Delta Lithium (ASX:DLI) in making a rare earths, copper or lithium discovery in the WA’s hot emerging Gascoyne mineral district.

He says the recent history of rare earths (NdPr) prices, down from levels as high as US$175/kg in early 2022 to ~US$60/kg currently, shows how much pull the Communist powerhouse has in the EV supply chain.

“I think most companies that are in the rare earths sector, as I have been for a long period of time, understand how difficult it is to get projects up and running ex-China,” he told Stockhead.

“Currently, there are only two commercial mines operating in the world outside of China. And that’s one in Western Australia with Lynas (ASX:LYC), and the big Mountain Pass mine in California. So they are very, very difficult.

“Now China has put a stranglehold on that sector, they keep lifting their quota for producing magnets, which is the end product for rare earths, they’ve done it three times in the last 12 months, a little bit unusual.

“And you can see that the price is coming down reflecting the increase of volumes of magnets that China is producing. They certainly don’t want any new mines and downstream processing opportunities, or plants starting up anytime soon.”

He said the key was not government support, but OEMs and carmakers willing to pay enough to incentivise Western production.

“That’s the big challenge because most of the raw materials go into the car sector, and the car and the automotive sectors are notorious for wanting the cheapest, not necessarily always the best.”

At the same time, Reid is extremely positive on the long term outlook for lithium, rare earths and especially copper, with its 3600km2 land package in the Gascoyne bounded by Dreadnought’s Yin rare earths find to the north and Delta’s Yinnetharra lithium pegmatites to the south.

“We’ve got some great copper targets, I’m very bullish, and long on copper and we’ll probably expedite some of those copper targets first, but if we had a lithium one, I’d certainly be drilling that as quick as I could as well,” he said.

“There’s a lot of interest in a lot of companies going long on copper, there certainly is going to be a strategic shortfall in that sort of space and if we can latch on to something over the course of the next few months, then I certainly think that we’ll be expediting it and trying to develop a resource in that area first.”

Gold names also carry weight

Morgans analyst Kyle Williams, a former BHP (ASX:BHP) rock kicker, said interest was also creeping back into the gold space.

“You’ve got a pretty strong price, costs are sort of peaking I think in the industry,” he said.

“So the development companies look cheap right now, they’ve been sold off quite a lot and at this point in the cycle, they’re looking quite good.

“Also the emerging producers, companies like Red 5 (ASX:RED) (owners of the King of the Hills mine in WA) they’re ramping up.

“There’s a bit of risk baked into the emerging guys but when they overcome those hurdles, they’ve got a clean run ahead of them.”

He also likes uranium, citing Deep Yellow (ASX:DYL), the owner of the Tumas project in Namibia and Mulga Rocks asset in WA as one to watch, as well as Ghana focused Atlantic Lithium (ASX:A11) and the aforementioned Delta Lithium in the EV metals space.